The South African insurance industry is set to adopt regulations that may affect your pocket in the short term but which will probably make the industry a lot more transparent and accountable in the long term (which can only be a good thing, right?).
The European solvency regulations — known as Solvency II — have given rise to the local Solvency Assessment & Management (SAM) model, which will bring the South African industry in line with global standards. The regulations look at capital requirements for short-term and long-term insurance companies, which will affect their risk management standards.
Importantly, the regulations can minimise solvency risks — in other words, whether or not companies can pay their debts. Insurers will have to more accurately determine the insurance risk on their balance sheets and disclose these to comply. In a nutshell, this will protect policyholders as companies will strive for low-risk profiles and better risk management, as this will undoubtedly lower their capital requirements.
“These new solvency regulations will result in a more conscious protection of the balance sheet in favour of the insured,” said Adam Samie, CEO of Lion of Africa Insurance.
Of course, these regulations have been put in place in Europe to protect the financial system’s long-term stability, especially in the wake of the credit crisis. As early as 2005, European Central Bank president Jean-Claude Trichet told the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS) that a growing closeness between banks and insurance could potentially put the insurance industry at greater systemic risk and policyholders might need greater protection as a result.
According to Samie, South Africa weathered the global financial crisis well, but it has become impossible to see insurance as a local, insular business. “It can’t be ignored that short-term insurance is a global business, particularly for smaller companies that are required to do reinsurance with global companies,” Samie said.
Ultimately, although Samie feels consumers’ pockets will feel the pinch in terms of the cost of implementing the new regulatory framework — he sees the one-off cost as being 5% of turnover, for example — he believes the new framework will lead to lower and more consistent pricing in the industry.
“An unintended consequence is that fierce pricing competitions could dissipate, because insurers won’t be racing to outdo other insurers in terms of quotes,” Samie said. “There can’t be dramatic variations in the costing of risk, since accuracy and transparency will be paramount.” Samie believes the differential will come in terms of quality. “Companies will need to pay more attention to service and value,” he said.
Although insurers are only just preparing for the big changes, it’s expected that there will already be significant developments by 2012 — for example, the limits on capital will change. Samie says this will usher in a fairer system that will bring other service providers into the picture, like captive insurers and underwriting managers. Insurance companies will be expected to provide certainty for their customers, too, with real consequences for poor practices.
Will smaller companies be able to compete with larger ones? According to Samie, they may in fact be better off as they will be able to make and implement changes more easily.
“A large company that looks well capitalised may have little balance sheet protection through reinsurance, for example, so in the event of a run on large losses a company may get into trouble. A smaller company might be forced to have a lot of reinsurance protection, because of its size, and would therefore be better protected against big shocks,” he said.
This industry shake-up should see policyholders in a better position in the long term, with a healthier insurance industry presumably forced to comply with more stringent regulations — not a bad thing for the consumer, extra costs notwithstanding.
“Growth in premiums is likely to change,” said Samie, “so you’ll be looking at greater competition as companies want to increase and maintain market share. In that sense, consumers can probably expect better deals in future.”
And presumably fewer complaints to take to the Ombud for Financial Service Providers, too — the Ombud’s recently released annual report shows that the majority of complaints about products relate to long-term assurance products (24,55%) and short-term insurance products (18,67%). Other complaints related to investments (13,29%), retirement (5,36%) and medical schemes (1,07%), while 37,06% were not classified).
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